Silicon Valley Chapter

Transcription

1 Silicon Valley Chapter Subpart F: Legislative Update Review and Planning Strategies March 23, 2017 Biltmore Hotel & Suites, Santa Clara Lowell D. Yoder

2 Tax Reform Proposals President Trump Senate: Portman-Schumer House: Republican Blueprint 1

3 Trump Proposal 15% corporate tax rate Elective expensing of capital expenditures for manufacturers 10% tax on accumulated foreign earnings Repeal deferral? Some other anti-offshoring measure (e.g., tariff on goods sold into the U.S.)? 2

4 Portman-Schumer Corporate tax rate in mid-20s? Exemption for foreign dividends (transition tax on foreign earnings) Base erosion rules Innovation box Interest expense limits 3

5 House Republican Blueprint 20% corporate tax rate Border-adjusted cash flow tax Investment incentive immediate expensing of capital expenditures Net interest expense not deductible Repeal most tax preferences other than R&D credit Territorial 100% dividend exemption Subpart F repealed (except FPHCI) Toll charge on foreign earnings (8.75%/3.5%: cash/non-cash) 4

6 Border-Adjusted Cash Flow Tax 20% tax on cash flow from sales of goods, provision of services, and license of intangibles to U.S. customers No tax on cash flow of a U.S. or foreign corporation from sales of goods, provision of services, or license of intangibles to foreign customers No deduction for costs of inputs/goods purchased from foreign parties, service fees paid to foreign parties, or royalties paid to foreign parties 5

7 Sell Products to U.S. Customers Sell $100M Products US Parent CFC $120M Sale of Products U.S. Customers 20% U.S. tax on cash flow Deduction for U.S. costs No deduction for $100M paid to CFC 6

8 Sell Products to Foreign Customers US Corp $100M US Mfg Expenses $120M Sales Foreign Customers No U.S. tax on cash flow Deduction for U.S. costs including $100M Mfg expenses (creates loss) 7

9 Services to Customers US Corp $100M Expenses $120M services Customers 20% tax on cash flow from services to U.S. customers, and no U.S. tax on cash flow from services to foreign customers Expenses generally deductible, except for amounts paid to foreign parties (including service fees and royalties) 8

10 US IP/CFC Business US Parent Owns IP No U.S. tax on royalties (and deduction for R&D) $100M Royalty No credit for any foreign w/h tax CFC Sales & Services Foreign Customers No U.S. tax on cash flow from CFC sales or services to foreign customers 9

11 Preparing For Tax Reform

12 Action Items Delay income recognition; accelerate expenses & losses (delay U.S. capital expenditures) Delay taxation of foreign earnings (Subpart F & repatriation) Reduce CFC earnings and cash Accelerate and utilize foreign tax credits Flexibility to restructure 11

13 Minimize Subpart F Income Develop Subpart F legal positions Delay transactions resulting in Subpart F income Accelerate expenses allocable against Subpart F income 12

14 Accessing Foreign Cash CFC repays loans from the U.S. CFC prepays U.S. for inventory, services & IP (but consider 35% vs. lower rate; 1-year deferral) U.S. delays payments to CFCs for inventory and services (but consider 956) Short term CFC loans to U.S. CFC return-of-basis planning 13

15 Foreign Tax Credit Planning Trigger U.S. taxation of high-taxed CFC earnings (dividend, 956 & 304) Accelerate foreign taxes (e.g., step up in basis for foreign amortization purposes) Address trapped taxes and deficits Consider accelerating low-taxed earnings to use up excess FTCs (or accelerate foreign source income) 14

16 IP Planning Put on hold taxable transfers of property to foreign subsidiaries? Delay U.S. income taxation of outbound transfers by licensing rather than selling IP (provides flexibility to unwind)? Coordinate onshoring IP with possibility of bringing IP to the U.S. 15

17 Acquisition Planning Model potential acquisitions with lower benefit for interest expense Consider toll charge on foreign earnings, and potentially higher tax rate on future foreign earnings (or zero tax) Ability to use foreign cash to fund deal Tax efficient post-acquisition integration may facilitate other planning objectives 16

18 Possible Operating Rules for Tax on Historic CFC Earnings E&P and deficits of all CFCs pooled (unclear if count hovering deficits or deficits in separate CFC chains, cf. 1248) Deemed FTCs pro rated (unclear how the toll charge would apply to FTCs and E&P in separate baskets) Treated as a deemed Subpart F inclusion? So, current year distributions are from PTI Consider change CFC tax year to 11/30 (e.g., deemed dividend for year beginning before 1/1/18) 17

19 Reduce CFC Cash Tax efficient repatriation Previously taxed income High taxed income Return of basis Invest in tangible or intangible property Eliminate short-term loans among CFCs (cash equivalents); CFC-by-CFC determination, but count cash once? 18

20 FinCo: Cash Equivalent $100 Equity $100 Loan (Short-Term) US Parent CFC HoldCo/ FinCo Idea: Capitalize CFC HoldCo/ FinCo loan CFC OPC2 $100 Purchase Real Estate 19

21 Cash Pool: Cash Equivalent US Parent CFC HoldCo $100 cash nets against $100 of OpCo #1 deposit Idea: Convert remaining OpCo #1 $100 deposit to long-term loan CFC OPCo #1 $200 Deposit CFC Cash Pool $100 Long-Term Loan CFC OPCo #2 $100 Cash 20

22 Reduce CFC E&P Trigger taxation of high taxed earnings Combine E&P and deficits Avoid taxable asset transfers Accelerate deductions Pension contributions ( 404A) Built-in loss assets 21

23 Post Tax Reform Planning (Blueprint)

24 Planning no Longer Necessary CFC sales and services income no longer subject to U.S. taxation under Subpart F Repatriation of foreign earnings no longer subject to U.S. taxation No foreign tax credit rules Cross-border U.S. transfer pricing? 23

25 Planning as Usual Reduce foreign income and withholding taxes (without Subpart F limitations) Tax effect interest expense offshore (double deduction in the U.S. no longer available) FPHCI planning? 24

26 New Planning Capital expenditures in the U.S. Move foreign IP back to U.S. (no tax in the U.S. and substance for BEPS) Move services and manufacturing back to U.S. (deductions in U.S. and substance for BEPS) Shifting foreign income to the U.S. (reduce foreign taxes) 25

27 International Tax Reform? Which international tax reform approach will be enacted? When will it be enacted and what will be the effective date? How will our trading partners react? 26